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Recision fight illustrates need for full disclosure

Policyholder wins round in court battle with Chubb

Recision fight illustrates need for full disclosure

A medical robotics firm's ongoing dispute with a Chubb Ltd. unit seeking to rescind its $15 million product liability policy highlights how important it is for policyholders to provide thorough information on their insurance application, experts say.

In Illinois Union Insurance Co. v. Intuitive Surgical Inc., Illinois Union, a Philadelphia-based Chubb subsidiary, is seeking to rescind the policy it issued to Sunnyvale, California-based Intuitive Surgical Inc. because the firm allegedly failed to notify it of possible litigation before the policy was issued.

Chubb contends it would not have issued the policy had it known the extent of possible litigation against the firm.

The other insurer that had participated in the litigation, New York-based Navigators Specialty Insurance Co., which had an excess policy that provided $10 million in claims made coverage over Illinois Union's primary policy, reached a confidential settlement with Intuitive, according to court papers filed last month in U.S. District Court in San Francisco.

In the most recent development, the District Court on May 27 denied a partial summary judgment motion by Illinois Union to dismiss the case in part because three underwriters had changed their testimony.

According to the court papers, Intuitive Surgical' s one product line, the da Vinci Surgical System, has been in use since the early 2000s and had performed more than 400,000 procedures by 2012.

The surgeon using the minimally invasive robotic system sits at a console away from the patient and manipulates robotic arms with a variety of microsurgical attachments. Intuitive said the system causes less trauma and requires shorter hospital stays than traditional surgery.

Illinois Union issued a product liability insurance policy to Intuitive that was in force from March 2013 through March 2014. The policy provided for $15 million in coverage, subject to a $5 million limit for each occurrence and a $5 million aggregate self-insured retention.

Illinois Union contends that, though Intuitive disclosed 24 open claims when it applied for the insurance, it did not mention 734 “tolling agreements” with claimants. A tolling agreement waives a right to claim that litigation should be dismissed because a statute of limitations had run out.

“The undisputed facts show that Illinois Union is entitled as matter of law to rescind the product liability policy it issued to Intuitive based on concealment of material facts in the application process for the policy,” Illinois Union said in court papers.

U.S. District Judge Jon S. Tigar said in his May 27 technical ruling that while Chubb issued an insurance binder to Intuitive Feb. 27, 2013, it issued a revised binder and insurance policy April 29, 2013, and the concealment should be determined as of the April 29 date.

Judge Tigar said there is a “material dispute” as to whether Illinois Union knew about the tolling agreements before April 29. All three of Chubb's underwriters initially testified they had learned of the tolling agreements by March or April of 2013, he said in his ruling.

Judge Tigar also said the three subsequently submitted errata stating they had not known of the tolling agreements until at least May 23, 2013, which creates a dispute as to whether Illinois Union waived its right to rescind the policy.

A Chubb spokesman said the company does not comment on pending litigation.

“It is not unusual, in my experience for an insurance company to assert there was some misrepresentation by the policyholder” when it faces a claim, said David E. Weiss, a partner with Reed Smith L.L.P. in San Francisco.

It is common for insurers to assert rescission in coverage litigation, said Sherilyn Pastor, a partner with McCarter & English L.L.P. in Newark, New Jersey. Neither Mr. Weiss nor Ms. Pastor are involved in the case.

However, the court pointed out that insurers' right to rescind a policy is “subject to a number of limitations,” said Mary Craig Calkins, a partner with Kilpatrick, Townsend & Stockton L.L.P. in Beverly Hills, California.

Policyholder attorneys say while they believe Intuitive was not at fault here, the best way for policyholders to avoid or deal with rescission attempts is to provide complete information during the application process.

“When you're submitting an application for insurance, disclose everything that you even think could be pertinent,” said Stephen T. Raptis, a partner with Manatt, Phelps & Phillips L.L.P. in Washington.

The case “underscores the importance of vetting the application process,” said Roberta Anderson, a partner at K&L Gates L.L.P. in Pittsburgh.